Cost-of-Living Adjustments
SSA Publication No. 05-10526, October, 2011 (View .pdf)
Social Security and Supplemental Security Income (SSI) benefits are adjusted to reflect the increase, if any, in the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) prepared by the Bureau of Labor Statistics (BLS). The purpose of the cost-of-living adjustment (COLA) is to ensure that the purchasing power of Social Security and SSI benefits is not eroded by inflation.
For purposes of determining the COLA, the average CPI-W for the third calendar quarter of the last year a COLA was determined is compared to the average CPI-W for the third calendar quarter of the current year. The resulting percentage increase, if any, represents the percentage that will be used to increase Social Security benefits beginning for December of the current year. SSI benefits increase by the same percentage the following month (January). If the increase in the CPI-W is at least one-tenth of one percent (0.1 percent), there will be a COLA. However, if the CPI-W increases by less than 0.05 percent, or if the CPI-W decreases, there will not be a COLA.
Congress enacted the COLA provision as part of the 1972 Social Security Amendments. Prior to enactment, increases in Social Security benefits had to be enacted by Congress on an ad hoc basis. At that time, inflation was relatively high, so the provision enacted in 1972 provided for an automatic COLA only if the increase in the CPI-W was at least 3 percent, the so-called "3-percent trigger."
By the mid-1980s, as inflation began to wane, it became apparent that because of the 3-percent trigger, it could be possible that there would not be an annual COLA. In 1986, Congress enacted legislation to eliminate the 3-percent trigger.
There are a number of other automatic increases in the Social Security program. Two of these increases are based upon increases in the national average wage index, but are triggered only if there is a COLA for Social Security benefits. These increases are:
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The contribution and benefit base—the cap on the amount of wages and self-employment income subject to Social Security payroll tax; and
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Retirement earnings test exempt amounts—caps on the amount of earnings that a beneficiary can earn before a reduction in benefits will apply.
Unlike the Social Security COLA, the CPI-W plays no part in the computation of the Medicare Part B premium. The Medicare Part B premium changes each year, if necessary, so that the Part B premium is sufficient to fund approximately 25 percent of the projected cost of the Part B program. Any such premium change is effective in January.
Information about Medicare changes for 2012 will be available at www.Medicare.gov.
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